The Kenya Revenue Authority (KRA) is likely to lose its power to unilaterally impose a new inflation tax on a wide range of goods including fuel, bottled water, juice and beer from July 1.
This follows amendments to the Finance Bill by the National Assembly’s Finance Committee, which requires the taxman to seek parliamentary approval for the new tax.
Under the current law, the KRA Commissioner-General only needs to issue a legal notice stating the adjustment for it to become effective.
This was the case last year when excise duty on at least 31 goods rose by 5.15 percent and was this year expected to increase by another 5.5 percent, setting the stage for higher retail prices beginning next month.
Now, KRA will be required to seek the approval of the Treasury Cabinet Secretary before making the specific excise rate adjustment, and thereafter the legal notice will be taken to Parliament within seven days of publication for consideration. Parliament will, within 28 sitting days of receiving the notice, decide whether to approve or reject the inflation adjustment.
MPs will next week vote on the recommendations of the House committee before the President signs the new Finance Bill into law.
“The amendment is to provide that the commissioner should seek approval of the Cabinet Secretary before making the inflation adjustment. Further, it is to require that the Gazette notice be laid before the National Assembly,” said the committee in its report.
“The National Assembly should have power to check the powers it has donated to the commissioner to make inflation adjustments, and, may or may not approve the adjustment.”
The adjustment has been in line with the law that demands excise duty to be revised upwards in tandem with the cost of living measure or the average rate of inflation in the 12 months through June.
The tax increase will hit consumers hard as households and traders reel from the impact of the Coronavirus disease, which has reduced shoppers’ purchasing power on job cuts and movement restrictions, forcing businesses to cut down their activities.
Inflation adjustment tax was introduced in 2018 and is seen as a means of protecting the government’s spending power from erosion by rising cost of living and avoid seeking MPs’ nod for higher retail prices.
Super petrol was expected to increase by Sh1.16 at the pump as dealers’ inflation adjusted excise duty rises to Sh22.07 a litre from the current Sh20.91. Kerosene and diesel prices were set to increase by Sh0.60 a litre
Fuel prices have a big effect on inflation because Kenya’s economy depends heavily on diesel and petrol for transport, power generation and agriculture, while kerosene is used in many households for cooking and lighting.
The average inflation for the 11 months to May stood at 5.51 percent.
This set the excise duty on beer at Sh6.10 a litre with the tax currently at Sh110.62 a litre or Sh55.31 a bottle, giving Kenya one of the highest rates of tax on alcohol on the continent.
The excise on spirits is set to go up by about Sh13.40 per litre from Sh253 per litre, while wine will attract an additional Sh10.41 tax from the current Sh189 per litre.
Firms like East African Breweries Limited (EABL) have been increasing beer prices by Sh10 per bottle in response to the inflation adjusted tax.
The listed brewer has issued a profit warning for the year ended June on reduced sales following the closure of bars and hotels to limit spread of Covid-19, and had previously warned of tax-induced drop in beer demand. Other items that are set to attract higher taxation include cigarettes, cigars, fruit juices and motorcycles.
The Treasury is betting that the inflation tax and removal of a range of tax exemptions including for oil and gas exploration, hiring of helicopters and purchase of planes as well as importation of cars and tractors will help to make up for revenue lost to the impact of the pandemic crisis.
As well as a drop in tax collection caused by reduced business activities in the wake Covid-19 pandemic, Kenya also cut the corporate and personal income tax rates in April to boost demand and help firms keep workers on their payrolls.
Manufacturers affected by the excise taxes have opposed the annual inflation adjustments, arguing that it leads to price instability and distort the overall inflation.
They have proposed that the increment be spread over three years to give them enough time to adjust. The firms have also argued that uncertainty around the rate of annual changes would make it difficult for them to make long-term investment decisions.
For the Treasury, the new system simplifies the tax system since the increments are automatic and do not require any additional approval from Parliament because it is already in law.
Tax collections are set to cover just half of the Sh3.23 trillion budget for the year starting July, setting the stage for increased borrowing.